As a real estate investor, what should your real estate accountant be advising you about for the 2016 tax season, and the coming of 2017? We previously published this post last year, but with changes that have occurred in 2016, we thought it was worth reviewing, and updating with the latest information.
1) NEW for 2016: Principal residence exemption reporting for tax season
New for this year, which may catch some real estate investors off guard, is the requirement to disclose the sale of a principal residence. Formerly, the CRA allowed taxpayers to refrain from reporting these dispositions provided that there was not a gain to report. Effective for 2016, disclosing transactions for which you are claiming the principal residence exemption is mandatory. (The principal residence exemption makes the gain on the sale of your property partially or completely tax-free.) This disclosure will, of course, make it easier for the CRA to identify transactions which they may wish to look at more closely. They will also be able to see those taxpayers who make more frequent claims over the years, and who may be abusing the rules. For more details, see Principal residence exemption & your 2016 taxes.
2) Review your year – what happened to you and your real estate investments last year?
Do you remember how little you remember about last year? What expenses did you have and what did cash spent relate to? Here are some recommendations on where to start getting ready for your tax return:
- Review last year’s tax returns for items that are likely applicable this year
- Review your notes from your last planning meeting with your real estate accountant for new items
- Review the personal tax checklists on our website for new deductions, changes to your business that provide opportunities for new deductions, or to see if there are additional points you haven’t thought of before. We have checklists of common deductions for real estate investments, automobile expenses, home office expenses, business/investment deductions and general items.
- Make a promise to yourself after you organize your information to stay organized. The same thing will happen next year, unless you organize yourself better now.
3) Decide: to CCA or not to CCA this tax season?
Tax season brings many questions from our clients about CCA. Taking depreciation on a property, or capital cost allowance (CCA) in tax terminology, allows you to shelter taxable income from immediate taxes. Ultimately, these taxes will likely be repaid when the property is disposed of as part of “recapture”. Generally though, when you sell a property, money is available to pay taxes as compared to through the years of ownership when money may be harder to come by. So, in effect, often the question should be rephrased to ask, “Would you like an interest free loan from the government for a number of years or not?”
Are there exceptions? Absolutely. If a property may be used as your principal residence, which can ultimately be disposed of tax free, claiming CCA typically removes this possibility of receiving the proceeds tax free. Or, in a particular year you may have a lower income so it doesn’t make sense to claim CCA. Instead you can save it for higher income years.
4) Determine repairs vs. capital expenditures…deductions now or over time?
Each year we have discussions with our clients about what they can or can’t claim as repairs, which they can deduct immediately, and capital expenditures, which are deducted over a long period of time. While admittedly more of an art than a science, we need to consider:
- Is this something that has an enduring benefit to the property?
- Is it to maintain or better the property?
- Is it integral to the property or a separate asset?
- What is its relative value compared to the total value of the property?
- Is the expenditure incurred during the first year or year of sale?
All of these factors go into helping decide whether you can claim the expense, or have to capitalize it over many years, thus potentially taking CCA over many years.
As some common examples, provided the expenditures were not in the first or last year of ownership, replacing a roof or windows tends to be repairs in my opinion, whereas adding a room or finishing a basement is capital in my mind. Refinishing bathrooms and kitchens tends to be areas where we look for more specific details before judging.
5) Condo special assessments…review special tax treatments with your real estate accountant
You have discovered that your condo corporation has approved a special assessment for your investment units. Essentially, additional funds need to be raised beyond what the normal monthly condo fees will cover. How do you account for these costs at tax time?
Fortunately, in many cases, the amounts are simply deducted as they are incurred. Essentially, you have to determine what the purpose of the special assessment is to see whether you can expense or capitalize the amount. For example, if the assessment relates to installing a new pool and fitness centre, you will capitalize the amounts. Whereas repairing common areas or landscaping would typically be expensed.
6) Get online now…before your tax deadline
In 2017, CRA continues to add more access and services to its online portal, so it’s a good idea for you to set up online access to your account right now as the process takes a little time. Once you are registered for your personal and/or business accounts, you can authorize other people on your accounts, find notices of assessment, make requests, and make payments.
7) Start thinking about the coming year now
Start planning with your real estate accountant…but after March and April please. (And, if they have lots of time in tax season, should you be working with them?) We and other advisors appreciate your understanding. When you need the time, we’re there to help you answer the question: “What is my plan?” It should integrate and develop your financial, business, family, health, spiritual, fun, and personal sides. Life is short. Do your best to ensure that what you do now gets you to where you want to be.
George E. Dube, CPA, CA
Tax Partner, BDO Canada
Real estate accountant, real estate investor, speaker, author
How is private lending profits or revenues taxed? Can they be sheltered to defer paying tax?
Good afternoon Lou,
Thanks for the question. Where the income is generated through a corporation, it is generally considered to be passive, or inactive, income. In using current rules, initially taxed at approximately 50%, depending on the province or territory. With the proposed tax changes announced July 18th by the Federal Government, it is unclear how these profits will be taxed within a corporation effective January 1st, 2018. While we cannot be sure, it would appear that the government would like to tax these at approximately 50% without a form of refundable tax. Using current rules, approximately 30% of the 50% tax that I mentioned could be refunded to the corporation upon payment of dividends in most cases.
Where the investment is held personally, the interest income will be taxed at the marginal tax rate of the investor. Those tax rates will vary depending on the investor’s other sources of income. Regarding sheltering the income, in some cases, properly done, it is possible to have, for example, a second mortgage invested through an RRSP or TFSA. While there are some hurdles to go through in using a registered plan, clearly there are some tax benefits to consider.
I have a condo rental property that has significant building envelope issues and extensive repairs. As part of the repairs the siding, roofs, windows, doors, patios, and sidewalks are all being replaced, along with addressing the asbestos and water issues. As a result the condo unit has taken out a loan to cover, and my portion is about $30,000 which will be added to the condo fees over a 20 year period. In addition there will be about $10,000 in special assessments. How should each of these be treated – as a CCA or not? In addition the unit has lost $50,000 in market value as a result.
Yikes! Sorry to hear that you have to deal with this situation Jessica. It’s possible the various costs can be divided between capital and current expenditures. Some food for thought: http://georgeedube.com/2010/11/01/repairs-and-maintenance-vs-capital-expenditures/
Practically, it would be nice if the board identified for the owners their recommendation with respect to allocating the costs between capital and repairs and maintenance. This is particularly beneficial where multiple owners take the same tax filing position as compared to various allocations of the same amounts. Revenue Canada can then more easily argue a higher capital cost to their advantage. Consistency can be good. Generally the ongoing condo fees would be expenses whereas the special assessment may be divided in some fashion between capital and repairs and maintenance.
While I would certainly need more details it does sound like it may be possible to deduct the entire amount. Practically dealing with this with your board would likely make the best of a bad situation.